Looking ahead on airport growth

posted on 6th April 2018

Michael Grimes, a partner at UK-based international law firm Eversheds, offers his thoughts on some of the bigger considerations that will be associated with future airport development

Over the next 20 years, new airports will be developed at a pace unseen for many generations. Existing airports must adapt to increased automation, better IT and cost pressures that the dominance of low-cost carriers will exert worldwide.10. AS-Win15_AirportGrowth_1

Already, for many years, airports have needed more than just airline revenue. Long-established airports have been bolting on car parks and shopping to attract fliers’ money.

Where governments and municipalities are ambitious for growth, with flexible planning laws, a flexible working population, ambitious industry and land available for development, new mega airports are being created. These echo shipping ports developed during 19th Century industrialisation, where the port acted not only as a gateway for products and people moving both in and out but also as a catalyst for homes, jobs, manufacturing and services provision – and they became a self-fulfilling success. Smaller scale developments are also taking place, such as significant upgrades of landside, airside or air traffic control infrastructure. An airport’s life and prosperity are closely woven with the regulatory and economic fabric of its host.

When developing infrastructure, those involved should consider the national and regional policy and regulatory context. Almost inevitably, the private sector will participate at every level in the development of an airport through design, building, finance and operation. Different countries have different approaches and more developed economies with detailed legal and regulatory frameworks offer less risk – but perhaps less reward – to investors. In developing economies, those involved should consider the country’s rules on tendering and the award of contracts, the rights to generate revenues by user charges or infrastructure rental and the rules around letting concessions.

Airports generate revenue in many ways, including take-off and landing charges levied on airlines, apron charges for aircraft parking, passenger handling fees and – increasingly – revenues from airport activities not directly related to flying operations, most notably car parking, leases of adjacent land to businesses either airside or landside, and rents from concessions within the terminal. The vagaries of these income streams affect the availability of capital for both upgrades and new builds, and their respective contributions differ from country to country.

Four key approaches to levering in much need private capital that have been employed, and will continue to be used, are:

a) Privatisation by floating an airport company on the stock market or selling the airport in a trade sale. In countries with a less developed stock market, the latter is more likely

b) The letting of a concession transferring control of all or part of an airport to the private sector in order to finance and run it for perhaps 20 or so years. This gives the private sector a chance to recoup its capital investment and make a sufficient profit overall. Concessions can include significant works such as building a new runway, new air traffic control facility or a whole new airport. Sometimes profitable and unprofitable aspects are bundled together into one concession. Concessions are usually managed by a consortium of an operator, a construction company and a funder

c) A strategic partnership in which a private sector company takes a stake in a publicly owned airport and is also awarded a management contract for aspects of the airport operation, so that it can use its skills to upgrade performance

d) Management contracts in which the private sector manages aspects of an airport, such as a terminal or air traffic control

All these approaches need careful consideration of risk and reward, in order for an airport’s developers to choose both the optimum structure and then the optimum bidder. Risks differ depending on the degree of private sector involvement, and risks change over time.

In development, key risks include contractor time and cost over-run, as well as ensuring compliance with planning laws; in a management contract, key risks will include contractor service failure and compliance with airport regulations.

During the operations phase, demand and revenue considerations drive airport economics and many of the drivers lie outside the direct control of the operator. Without busy airlines, the revenues from car parking and terminal concessions will drop and it is this leverage which low-cost airlines use when agreeing their landing rights. Facing such risks in some countries, the private sector has required public sector guarantees of long-term revenues (perhaps paid in nominated currencies to protect the operator from currency risk).

Airport development, and especially airside working, is one of the most challenging environments for contractors to plan and execute works. Safety issues are paramount, requiring compliance with extremely onerous health and safety requirements and the co-ordination of many interfaces. These risks must be managed by rigorous planning and scenario testing in combination with strict management of safety rules. On the commercial side, the consequences of breach could be both catastrophic and costly, so a careful review of the contractual provisions around indemnities and insurance is key. However, none of these challenges is slowing the continued development of aviation worldwide.